Alpha Natural reaches $7.1B deal for Massey Energy

Sunday

Jan 30, 2011 at 12:01 AM

By Andrew Vanacore and Tim Huber ASSOCIATED PRESS

NEW YORK - Massey Energy Co., struggling with losses after an explosion that killed 29 workers at a West Virginia coal mine last spring, agreed Saturday to be taken over by Alpha Natural Resources Inc.

Alpha is paying $7.1 billion in cash and stock for Massey, the nation's fourth-largest coal producer by revenue. Massey operates 19 mining complexes in Virginia, West Virginia and Kentucky including the Upper Big Branch mine where the April 5 disaster occurred.

Alpha is offering 1.025 share of its stock for each share of Massey, plus $10 per share in cash. Together, that represents a bid of $69.33 per share, a 21 percent premium over Massey's closing share price Friday.

In an interview, Alpha CEO Kevin Crutchfield said the acquisition will offer greater access to international markets. Shortages of coal for making steel have driven up prices around the world, a trend Alpha hopes to capitalize on.

"We sell into 20-some countries now and that will increase significantly," Crutchfield said.

Asked about safety concerns at Massey's operations, Crutchfield said, "We try to let our performance speak for itself. Nobody is perfect, but we have a very good record regarding safety and a good working relationship with regulators."

He added, "Massey has a lot of great people who want to do the right thing."

A sale of Richmond, Va.-based Massey was expected even before the sudden retirement last month of Don Blankenship, the company's CEO. He was the strongest advocate for remaining an independent company on Massey's board.

The company's losses since the disaster were another factor leading to its sale. Massey lost a total of $130 million in the second and third quarters of last year. It has not yet released fourth-quarter results. Alpha expects the deal will help the combined company cut costs by at least $150 million a year.

Recent reports have suggested Massey was also being sought by global steel conglomerate ArcelorMittal SA.

Alpha, based in Abingdon, Va., is the leading U.S. producer of metallurgical coal - the kind used to make steel as opposed to electricity - while ArcelorMittal already owns several metallurgical coal mines in Appalachia. Demand from steelmakers allows coal producers to charge premium prices of $200 or more a ton, more than double the price of Appalachian coal sold to power plants.

About 1.3 billion tons of Massey's 2.9 billion tons of coal reserves is metallurgical coal. Under Blankenship, the company increased coal exports and opened important inroads to India, which is seen as the next big industrial market by some in the coal industry.

Massey has faced questions about its safety practices since a fire killed two miners at it Aracoma Alma No. 1 mine in West Virginia in January 2006. The fire helped persuade Congress to pass sweeping safety changes that year.

Alpha, on the other hand, has faced few questions about its safety practices and Crutchfield has been an invited speaker at industry safety conference. It has avoided major disasters, though several miners have died at its operations. Most notable was a roof collapse that killed two miners in Cucumber, W.Va., in January 2007.

The April explosion, the worst U.S. mining disaster in 40 years, is the subject of civil and criminal investigations. On Friday, Massey rejected nearly every part of the federal government's theory on what caused the deadly explosion. The company doesn't believe that broken equipment or an excessive buildup of coal dust contributed to the blast.

Instead, Massey argues there was a sudden inundation of natural gases from a crack in the floor that overwhelmed what it insists were good air flow and other controls that should have contained the blast. It acknowledged the shearing machine that cuts the coal may somehow have ignited the gas but said the company's own investigators haven't determined how. Massey won't issue its own report on the explosion until after state and federal investigators release theirs.

The proposed sale won't affect the investigation into the explosion, said J. Davitt McAteer, who was asked by former West Virginia Gov. Joe Manchin to conduct a separate investigation.

"It doesn't impact the investigation since the investigation looks at a moment in time and what lead up to that," said McAteer, who headed the federal Mine Safety and Health Administration during the Clinton administration.

"Hopefully the purchase by Alpha would be helpful in adopting a new culture that would establish safer operating procedures at these mines operated by Massey," he said.

The explosion is also being investigated by MSHA and the West Virginia Office of Miners' Health Safety and Training.

Miner Clay Mullins, who lost his brother Rex in the Upper Big Branch explosion, said it's a surprise anyone would want Massey.

"I really don't care what happens to them as long as there's men and there's families that need to make a living, I understand that, but Massey needs to be held accountable for the 29 men they murdered," Mullins said.

The companies said the deal is expected to close by mid-year. It must be approved by regulators and Alpha and Massey shareholders. If approved it will create a company with combined annual revenue of roughly $7 billion and more than 12,000 employees.

Massey's stock closed Friday at $57.23. The stock had tumbled from its close of $54.69 the day of the explosion to a low of $26.31 on July 2. Investors sensing the possibility of a takeover have bid the stock higher since then.

Investors profited under Blankenship, but the former CEO alienated neighbors of his company's mines over environmental issues. His staunch defense of the company after the explosion raised more anger.

A statement from Alpha executives and Massey's current CEO, Baxter F. Phillips Jr. did not mention the disaster.

Coal broker A.T. Massey created the company bearing his name in 1920. Massey was sold in 1974 to St. Joe Minerals, which later formed a partnership with Royal Dutch/Shell Group in 1980. A year later, Massey Coal Partnership was purchased by Fluor Corp. Massey Energy was created in 2000 when Fluor spun off its coal holdings.

Alpha was founded in 2002 and went public three years later. It has grown to one of the industry's largest with a series of smaller acquisitions and the $1.4 billion takeover of rival Foundation Coal Holdings in July 2009

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